When the credit crisis hit and the real estate market all but collapsed, news of disgraced developers became commonplace, their tales more often than not layered with intrigue.
Take Kent Swig, who, after being divorced by his wife, filed an affidavit in May responding to a lawsuit filed by his ex-father-in-law, industry luminary Harry Macklowe, arguing that Mr. Macklowe embarked on a “vendetta” aimed at “starving” him of every last penny.
But as the downfalls of real estate tycoons like Mr. Macklowe, Shaya Boymelgreen, Bruce Eichner and Larry Gluck stack up like so many new developments across Manhattan’s skyline, analysts and the city’s landlords themselves have begun to wonder aloud if there’s a limit to how much real estate can be accumulated.
“A developer’s function is to develop property, and sometimes they develop and develop until they can’t develop anymore,” said appraiser Jonathan Miller of Miller Samuel Inc., a real estate appraisal and consulting firm based in New York City. “Where people fell short was that the market was more powerful than them … the market is brutal, and it has no compassion.”
In a reversal from just two years ago, lenders are once again agreeing to write down outstanding bank loans extended to real estate investors as the economy continues to rebound, analysts said.
As fundamentals such as rental rates and vacancy rates continue to improve, lending institutions such as J.P. Morgan Chase are increasingly willing to green-light write-downs, what accountants describe as a reduction in the book value of the real estate asset in question.
Accountants and financial analysts predict an increase in the use of 1031 Exchanges as tax cuts implemented more than a decade ago by then-President George W. Bush expire at the end of the year and other additional surtaxes threaten to add a 13.8 percent burden to real estate investors.
The tax strategy, so named for Section 1031 of the Internal Revenue Code, could draw renewed interest next year depending on how legislators vote on the tax cuts, which could increase from 15 percent to 23.8 percent if elected officials in Congress allow them to expire, said Kenneth Weissenberg of EisnerAmper.
Death and Taxes 2012
Since at least the early 2000s, carried interest, or the share of profits of an investment paid to an investor in excess of what he contributes to a partnership, continues to be a hot topic among not only real estate owners but hedge fund managers and private equity managers alike. Kenneth Weissenberg, a partner at EisnerAmper, spoke to The Commercial Observer about what commercial real estate owners should expect as the issue courses through Congress this year.